Transcript Extending the external costs framework

Extending the external costs
framework
Prof. Anil Markandya
University of Bath
External costs of energy and their internalisation in Europe
Dialogue with industry, NGO, and policy-makers
Friday, 9 December 2005
European Commission, Charlemagne building, Brussels
Giving the right price to energy
production
External costs
Internal or
private costs
Focus on EU 25, Bulgaria, Turkey, China, Brazil, India
NEEDS-IP and CASES-CA
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Internal or private costs of energy
production
• All technology and plant specific cost components:
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investment
operation and maintenance
fuel costs as well
costs related to pollution control
waste management
other health and environmental protection measures
• Technologies differ in their technical characteristics
and their economic indices from country to country
and over time.
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External costs (I)
Update impacts of:
• Acidification
– on freshwater fish
• Acidifying compounds
– (SO2, NOx and NH3) on terrestrial
ecosystems, including agriculture
• Eutrophication
– on drinking water, boating, swimming,
recreational fishing
• Visual intrusion
– landscape aesthetics of renewable energy
(wind and hydro) and eutrophication.
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External costs (II)
• Energy security
assessment of policy options to reduce and insure against - the costs of energy
insecurity
• Damocles risk
risk where the possible damage can be
very high, but the probability that it occurs
is very low
– mega-dams or nuclear power plants.
• Risk aversion
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External Costs (III)
• Systematization of costs.
– There are many estimates around but they are not all
comparable
• Forecasting of external costs
– How will external costs change as demand for energy
changes, as energy flows change and as
environmental controls get stricter?
• CASES looks at these issues
• Other issues relate to possible external costs of
social disruption (e.g. unemployment, alienation)
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How to internalize external costs?
• Different policy instruments, either to increase
the costs of producing fossil fuel based energy
or to promote the production of renewable
energy
• What social and fiscal implications will such
measures have, especially on poor and
vulnerable groups?
– Employment, energy prices, etc.
• What impact will different policies have on the
use of different types of energy?
• How acceptable are these instruments to the
public?
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Methodologies for the evaluation of
the external costs
• Monetary valuation through Cost-Benefit
Analysis based on the preferences of the
population affected by the external costs:
– Revealed preferences (travel cost method, hedonic
pricing method)
– Stated preferences (contingent valuation, choice
experiments)
• Cost Effectiveness Analysis
• Multi Criteria Decision Analysis
– involvement of stakeholders
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Example: Results from a Choice
Experiments study (Markandya et al, 2005)
• Goal: valuing the effects on (i) human health
and the environment, (ii) energy security, (iii)
employment sector of a policy for the promotion
of renewable energy
• Methodology: choice experiments (CE)
– CE ask individuals to choose between two or more
hypothetical “commodities” (policies) described by a
vector of attributes.
– The levels of the attributes are varied across the
policies, so that respondents trade them off, and one
of them is usually a cost amount, which allows the
computation of marginal prices of the attributes.
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Example of choice experiment (Markandya
et al, 2005)
Attributes
of the policies
Greenhouse Gases
emissions
Policy A
Policy B
Neither (Status
quo)
2% reduction per
year
1% reduction per
year
no additional greenhouse
gases emissions reduction
Black-outs
30 min per year
60 min per year
current level of black-outs
0 new jobs
1,000 jobs
no employment change in the
energy sector
£16 per quarter
£6.5 per quarter
no price increase in the
electricity bill
Employment
Price
Which policy
would you choose?
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Results from Markandya et al, 2005
• 300 in person interviews of residents of Bath
• Respondents are willing to pay for the following
effects brought by a policy that promotes
renewable energy (£/per quarter):
• £29 to decrease GHG emissions by 1% a year
• £3.60 to decrease energy shortages by 10
minutes a year
• £2.00 to increase by 1,000 the number of
permanent jobs in the energy sector.
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Conclusions
• 15 years of ExternE have shed light on the
external costs of energy production
• Stakeholders are more aware and accepting of
the external costs framework
• ExternE methodology has also been applied to
other areas (e.g. land use)
• The external costs framework is still improving:
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Criteria for evaluation
Treatment of uncertainty
Internalization of the external costs
Discussion with stakeholders
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